Original Source

Sunday August 19, 2001 10:14 PM ET

Signs of Economic Rebound Prove Elusive

By Caren Bohan

WASHINGTON (Reuters) - The sluggish U.S. economy was supposed to have begun perking up by now, pumped up by cheaper credit and tax rebates. Instead, its woes are proving to be more serious and long-lasting than economists thought.

Worries of a recession, which had faded in July after the government said U.S. gross domestic product recorded a narrow gain in the second quarter, have surfaced again.

The "R-word" has made a comeback in part because of expectations that second-quarter GDP (">GDP ( news - ">news - web sites) could be revised downward to show zero growth or possibly even a contraction.

But even more troubling are signs that the third quarter may look similar to the anemic April to June period. The current July-to-September quarter was precisely when most experts believed healthier data would start trickling in.

"The gloom has settled in and has gotten a bit thicker," said Mark Zandi, chief economist at Economy.Com in West Chester, Pa. "There are few indications that the economy is ready to rebound and that has created disappointment."

U.S. GDP rose a meager 0.7 percent in the second quarter, according to the Commerce Department (">Department ( news - ">news - web sites)'s "advance" or early estimate. Commerce is slated to provide a fresh GDP estimate on Aug. 29.

Based on data released over the past few weeks that show more aggressive inventory liquidation by businesses than Commerce originally assumed, many analysts think the 0.7 percent number will be revised down, perhaps to zero or below.

Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio, was among those who said growth could be nearly erased in the second quarter.

But he added, "I still think we will squeak by this year without meeting the definition of a recession."


Throughout the first half of this year, economists pinned their hopes on the third quarter as the likely time for growth to start picking up.

The third quarter was around the time that companies, which had racked up shelves full of unsold goods, were expected to have finally cleared out much of their inventories, allowing them to step up production again.

It is also the period when economists believe much of the impact from the Federal Reserve (">( news - ">news - web sites)'s 2.75 percentage points in interest-rate cuts during the first six months of this year will kick in. Such timing would be consistent with the theory that rate changes affect the economy with a lag of six to nine months.

Additionally, consumers are starting to receive checks of up to $600 per household from the government under the recently enacted tax-cut package.

It is still quite possible that an economic improvement is right around the corner, analysts said. But there have been scant signs of it so far.

"It's like waiting for a pot to boil," said James Glassman, economist at J.P. Morgan in New York. "People are running out of patience."


In the closely watched survey by Blue Chip Economic Indicators, private economists in August slashed their forecasts for U.S. economic growth in the second half of 2001.

They projected a 1.7 percent gain in third-quarter U.S. GDP, down from July when they were expecting a growth rate of 2 percent. For the fourth quarter, the consensus forecast fell to a growth rate of 2.8 percent from 3 percent previously.

Analysts widely expect the Fed to trim rates a seventh time after its meeting on Aug. 21 and a growing number believe yet another reduction could occur at the meeting on Oct. 2.

One of the bleakest economic signals lately came in the Fed's periodic "Beige Book," released on Aug. 8, which said that the troubles in the hard-hit U.S. manufacturing sector had begun to spill over into other areas of the economy.

On the other hand, the government's figures on retail sales indicate that consumers, while they have become more cautious, have not pulled in their reins entirely.

The Commerce Department on Tuesday said retail sales came in flat for a second straight month in July. But sales excluding cars and trucks edged up 0.2 percent in July.

Zandi and other economists said that consumers, whose spending drives two-thirds of economic growth, could well keep the U.S. economy from sliding into a recession.

"The hope is that consumers keep on spending modestly and that would mean the drags from the business sector will become a little less onerous," he said.

But Zandi added that even if spending holds up, the economy's woes could linger for a while, putting off a full-fledged recovery until early 2002.